Many complain about HFT, but it can create opportunities for both the “Big Boys” and for you. HFT traders love to short squeeze highly shorted stocks, especially ones that are high growth stocks. The more highly shorted they are, the more easily they can be pushed up, especially in a rising market. Many times the valuations make no sense. Yet people keep buying based on momentum or emotion. The HFT traders love this because they can keep squeezing the shorts with the help of these momentum and emotion traders. The trick is to figure out when the HFT traders are going to let the stocks fall.
People have been saying CRM is too highly valued for some time now. EPS growth was -30.40% year over year in the most recent quarter (Yahoo Finance). Yet CRM has gone up 20+% in the last month. The EPS estimates have remained virtually unchanged for the past 3 months (Yahoo Finance). The growth is projected to be a healthy 87.80% in 2010, but a more restrained 28.80% in 2011. On top of that there has been a large amount of insider selling. Virtually all insider transactions have been sales for the last month or more. The Chairman/CEO Marc Benioff has been selling approx. 10,000 shares every day since at least the beginning of August (I didn’t bother to look further back). This amounts to in excess of $25M in CRM stock.
Other company officers have been selling too. Virtually none have been buying. Does this mean they lack faith in their company? I am not sure. I am fairly certain it means that they believe that the company is over valued. I mean “a lot over valued“, not just a little. This company currently sports a P/E of 210 and an FPE of 77. If this stock performs as expected (and the price doesn’t rise a cent), it will be highly valued for a 28.8% grower at a P/E of 77 at the end of 2011. Plus there is no huge growth move predicted for the future. The 5yr avg. growth estimate from here forward is 28.07%/yr vs. the previous 5yr avg. growth rate of 43.99%/yr . That’s quite a slow down. A few more statistics are below (from Tdameritrade):
Price/Sales (TTM) = 10.38
Price/Book (MRQ) = 12.18
PCF (TTM) = 105.11
Short Interest = 9.70% of Float (as of Aug. 31 -- Yahoo Finance).
Return on Equity = 7.24% vs. an industry avg. of 37.33% (definitely over valued)
Total Cash/share = $5.73
Quarterly Earnings Growth (YoY) = -34.39% (MRQ)
Quarterly Revenue Growth (YoY) = 24.78% (MRQ)
Beta = 1.7
The recent chart indicates some weakness, but it is not as yet demonstrable. This means this is likely a good longer term short, but it could see some up blips in a strongly rising market. Thus far the futures are up for Monday. Many think the retail sales numbers will be at least decent on Tuesday. The Initial Claims number for Thursday is unclear. Volume has been extremely light lately. HFT traders could push the market up in the absence of any other impetus. They tend to control the market when volume is light. The big overhead resistance is at about $113 on the SPY. The SPY closed at $111.48 on Friday. If you want to be safer, you might want to wait until the SPY reaches this level. You could continually evaluate the market’s position.
I waver here only because CRM is highly shorted. It is over 90% held by institutions. It is highly traded. This makes it perfect for HFT traders to short squeeze in an up market. In opposition to this several analysts (I was one, plus MarketWatch, TheStreet.com, etc.) suggested last week that holders of CRM sell their shares. It could continue to go down near term, even before the market does. I cannot time it that exactly for you. However, if you sell CRM short near its current price, it likely will move down a considerable amount at some point during this fall. The analysts have started to notice the lesser growth. The insiders have too. It only remains for the stock hypers to stop hyping it quite as much. As a comparison FFIV, another hot stock, sells at a PE of 58 and an FPE of 31. It has a next 5yr growth rate of 21.25%. This is a little lower than CRM's 28.07% estimate. However, it is not 4 times lower (based on P/E comparison), nor is it 2+ times lower (based on FPR comparison). CRM is a stock waiting to fall. The Chairman/CEO's behavior confirms this.
Disclosure: I have a small short position in CRM.